Academic highlight: Rethinking securities class actions

Posted Fri, March 7th, 2014 4:21 pm by Amanda Frost

Legal academics are playing an unusually prominent role in Halliburton Co. v. Erica P. John Fund, Inc., argued on Wednesday. At issue is whether the Courtshould rethink its approach to securities class actions established in Basic Inc. v. Levinson, and, if so, what the new standard should be. In Basic, a four-Justice majority embraced the “efficient capital markets hypothesis,” which assumes that capital markets integrate all public information into a stock price, and thus that purchase and sale price is always affected by material misrepresentations. As a result, plaintiffs do not have to prove that they relied on the misrepresentation when they purchased or held the stock, which makes bringing a class action on behalf of securities holders a much easier proposition. Halliburton, the petitioner in the case, is hoping to put an end to that presumption, replacing it with the requirement that securities plaintiffs first prove that the misrepresentations actually distorted the market price for the stock. At the very least, Halliburton wants the opportunity to rebut the presumption prior to class certification. Academic commentators have had a lot to say on this topic, and the Supreme Court appears to be listening.

Economics have long debated the efficient capital markets thesis, which may be why the Court is now taking a second look at Basic. Academic experts in securities law are weighing in as well in the hopes of shaping the Supreme Court’s view of these issues. In their article Rethinking Basic — cited in both both sides’ briefs — Lucian Bebchuk and Allen Ferrell argue that Justices should avoid addressing the thorny question whether markets are perfectly efficient, and instead focus on whether there has been actual fraudulent distortion of market price — a determination they argue can be made through the use of “event studies.” (Event studies examine whether there was a statistically significant reaction to a fraudulent misrepresentation, and are a commonly used analytical tool for establishing fraudulent distortion in markets.) This is also the position taken by Adam Pritchard and Todd Henderson, whose amicus brief was the subject of favorable discussion by the Justices at oral argument.

A dissenting view comes from Jill Fisch. In her article, The Trouble with Basic: Price Distortion after Halliburton, Fisch arguesthat event studies are of limited use, in part because they are not capable of measuring the effect that inaccurate statements confirming market expectations have on stock prices. For example, although event studies work well when measuring the effect of a fraudulent statement at odds with market expectations (for example, “the third quarter was surprisingly profitable”), they are less effective at measuring statements that are in line with market expectations (for example, “our third quarter profits were just as expected”). Securities fraud more often arises from an effort to cover up an unexpected problem than from making false statements about positive developments, and so Fisch asserts that they are not good tools with which to measure the effect on stock price in most of these cases. Indeed, as Fisch points out, Basic itself was an example of the latter type of fraudulent misrepresentation. Thus, the Court will have to decide not only whetherto scrap or modify Basic, but also whether there is any realistic alternative to its presumption that misinformation is incorporated into market price.

On Thursday, the justices met for their May 23 conference; John Elwood's Relist Watch compiles the petitions that were relisted for this conference.

Major Cases

Department of Commerce v. New York(1) Whether the district court erred in enjoining the secretary of the Department of Commerce from reinstating a question about citizenship to the 2020 decennial census on the ground that the secretary’s decision violated the Administrative Procedure Act, 5 U.S.C. 701 et seq; (2) whether, in an action seeking to set aside agency action under the APA, a district court may order discovery outside the administrative record to probe the mental processes of the agency decisionmaker -- including by compelling the testimony of high-ranking executive branch officials -- without a strong showing that the decisionmaker disbelieved the objective reasons in the administrative record, irreversibly prejudged the issue, or acted on a legally forbidden basis; and (3) whether the secretary’s decision to add a citizenship question to the decennial census violated the enumeration clause of the U.S. Constitution.

Lamone v. BenisekIn case in which the plaintiffs allege that a Maryland congressional district was gerrymandered to retaliate against them for their political views: (1) whether the various legal claims articulated by the three-judge district court are unmanageable; (2) whether the three-judge district court erred when, in granting plaintiffs’ motion for summary judgment, it resolved disputes of material fact as to multiple elements of plaintiffs’ claims, failed to view the evidence in the light most favorable to the non-moving party, and treated as “undisputed” evidence that is the subject of still-unresolved hearsay and other evidentiary objections; and (3) whether the three-judge district court abused its discretion in entering an injunction despite the plaintiffs’ years-long delay in seeking injunctive relief, rendering the remedy applicable to at most one election before the next decennial census necessitates another redistricting.

The American Legion v. American Humanist Association(1) Whether a 93-year-old memorial to the fallen of World War I is unconstitutional merely because it is shaped like a cross; (2) whether the constitutionality of a passive display incorporating religious symbolism should be assessed under the tests articulated in Lemon v. Kurtzman, Van Orden v. Perry, Town of Greece v. Galloway or some other test; and (3) whether, if the test from Lemon v. Kurtzman applies, the expenditure of funds for the routine upkeep and maintenance of a cross-shaped war memorial, without more, amounts to an excessive entanglement with religion in violation of the First Amendment.

Gamble v. United StatesWhether the Supreme Court should overrule the “separate sovereigns” exception to the double jeopardy clause.

Recent Decisions

Herrera v. Wyoming Wyoming’s statehood did not abrogate the Crow Tribe’s 1868 federal treaty right to hunt on the “unoccupied lands of the United States”; the lands of the Bighorn National Forest did not become categorically “occupied” when the forest was created.

Merck Sharp & Dohme Corp. v. Albrecht “Clear evidence” that the Food and Drug Administration would not have approved a change to a drug’s label – thus pre-empting a state-law failure-to-warn claim – is evidence showing that the drug manufacturer fully informed the FDA of the justifications for the warning required by state law and that the FDA, in turn, informed the drug manufacturer that the FDA would not approve a change to the drug’s label to include that warning; the question of agency disapproval is primarily one of law for a judge to decide.

Current Relists

Conference of May 23, 2019

al-Alwi v. Trump (1) Whether the government’s statutory authority to detain Moath Hamza Ahmed al-Alwi has unraveled; (2) whether, alternatively, the government’s statutory authority to detain al-Alwi has expired because the conflict in which he was captured has ended; and (3) whether the Authorization for Use of Military Force authorizes, and the Constitution permits, detention of an individual who was not “engaged in an armed conflict against the United States” in Afghanistan prior to his capture.

Box v. Planned Parenthood of Indiana and Kentucky Inc. (1) Whether a state may require health-care facilities to dispose of fetal remains in the same manner as other human remains, i.e., by burial or cremation; and (2) whether a state may prohibit abortions motivated solely by the race, sex or disability of the fetus and require abortion doctors to inform patients of the prohibition.

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On March 30, Justice Clarence Thomas spoke with former clerk Brittney Lane Kubisch and Pepperdine University President-elect James Gash at Pepperdine University School of Law. Thomas told the audience that he had no plans to retire from the Supreme Court.